America's Not Out Of Money

We're Not Out Of Money

Matt Welch at Reason makes the good point that none of the downballot mayors and governors who spoke last night at the Democratic convention grappled with the reality that a lot of them have been dealing with the thorny-but-necessary work of closing budget shortfalls, rolling back pension promises, and trying to wrestle with the limitations imposed by public sector labor agreements. He then concludes on a terribly wrongheaded note:

One of the great ironies of this convention already is that speaker after speaker denounces Republicans for being unable to tell the truth or get their facts straight. Meanwhile, one of the most important truths of modern governance—we are well and truly out of money—sits neglected in the corner. This might be a great way to rally the Democratic base, but it's thin gruel for the majority of Americans who think, correctly, that the nation's finances have spun out of control.

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As Mark Schmitt wrote last year regarding a book from Welch and co-author Nick Gillespie this assertion that America is "out of money" has become an all-purpose crutch through which Reason can push an ideological agenda of skepticism about programs without actually making the case in its particulars. But it's simply not true that we're out of money. Many states and municipalities are up against hard budget constraints, but the US government has the ability to create US currency in unlimited quantities. It hasn't run out of money and won't ever run out of money. It would be nice for people to understand this point separately from controversies over whether public sector programs are wise or just. In principle, the US government could print up or borrow a ton of money, hand it to state governments, and then have all the money used to cut taxes rather than to finance programs. This would not be possible in a world where the US government faced a hard budget constraint but, fortunately, we don't face any such constraint. The possible downside to a policy of greater reliance on money-finance or debt-finance is that it might make holding dollar-denominated financial assets less attractive to foreigners. That, in turn, would make imported goods more expensive domestically and American-made goods cheaper on foreign markets. If the United States were already at full employment that would be a very bad tradeoff, amount to a decline in average American living standards. But at a time of mass unemployment, it looks like a pretty good tradeoff that should raise per capita output and average incomes. It'd be a bad deal for me personally (or for Welch) since there isn't going to be a writing-on-the-Internet export boom, I buy lots of stuff that's made abroad, and the DC regional economy that Welch and I participate in has no meaningful manufacturing sector. But for America as a whole it could be a boon.

But whether you think that would be a good idea or not, the important thing is that the question of whether we should be borrowing more is entirely separate from the question of whether the borrowing should finance additional spending or lower taxes.

Joe Weisenthal has an important, if overstated, post along these lines arguing that the Clinton-era budget surpluses hurt the economy. His point is that households and firms, unlike the US government, can't run a perpetual budget deficit. People and companies are mortal and can't issue currency. We can borrow money and sometimes should borrow money, but over the long term income and spending need to add up in a way that isn't true for currency issuing sovereigns. Yet when the federal government runs a budget surplus, this has to be matched by extra borrowing elsewhere. That sets the broader economy up for a debt crisis over time, as borrowing is pushed away from the entity with the greatest capacity for borrowing (the federal government) and onto firms and households who eventually do face hard budget constraints.

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